Fredrickson v. Gem Insurance Co.

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
AUG 13 2002
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT

IRENE HICKMAN, and the class of
similarly situated persons,

Plaintiffs - Appellants,

v. No. 00-4082

GEM INSURANCE COMPANY, INC., a
Utah corporation, formerly known as Gem
State Mutual of Utah, Inc.,

Defendant - Appellee

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF UTAH
(D.C. No. 96-CV-1092-K)

Brian S. King, (Marcie E. Schaap and Nicole T. Durrant of King, Burke & Schaap, P.C.,
Salt Lake City, Utah, with him on the brief), for Plaintiffs-Appellants.

David M. Connors, (Bret F. Randall and Michael T. Hoppe of LeBoeuf, Lamb, Greene &
MacRae, L.L.P., Salt Lake City, Utah and Kevin J. Fife of Olson & Hoggan, Logan,
Utah, with him on the brief), for Defendant-Appellee.

Before EBEL, Circuit Judge, McWILLIAMS Senior Circuit Judge, and BROWN,
Senior District Judge*

The Honorable Wesley E. Brown, United States Senior District Judge for the District
*

of Kansas, sitting by designation.
BROWN, Senior District Judge.

The class action plaintiffs in this case brought their claims under the provisions of

the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§1001

through 1461.1 They alleged that their medical benefits insurer, defendant Gem Insurance

Company, had wrongfully refused to fully pay certain hospital room and board charges.

Specifically, plaintiffs alleged that defendant was liable under the provisions of 29 U.S.C.

§1132(a)(1)(B) for violating the terms of the insurance policies, and equitable relief was

requested under 29 U.S.C. §1132(a)(3) for defendant's failure to follow ERISA's claims

1
An order entered by the trial court on April 30, 1998, approved this litigation as
a class action, finding that "Irene Hickman, and the class of similarly situated persons" were
designated as plaintiffs in the action.

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procedure and notice requirements.2 They also alleged that defendant had failed in its

fiduciary duties under 29 U.S.C. §1104.3

The district court granted summary judgment to defendant, and plaintiffs appeal.

For the reasons stated below, we affirm.

Background Facts

The facts relevant to the insurance plans in question do not appear to be in dispute.

Plaintiffs entered into hospital insurance contracts with the defendant. Plaintiffs claimed

that Gem "paid only an internally calculated daily rate" which it set for hospital room and

board expenses, without disclosing what that rate would be in the policies. Plaintiffs

alleged that defendant breached its contracts by limiting reimbursement of hospital room

and board rates and by failing to follow industry practices relating to such charges.

2
Section 1132(a)(1)(B) provides in pertinent part that:

(a) Persons empowered to bring a civil action
A civil action may be brought-
(1) by a participant or beneficiary-
***
(B) to recover benefits due to him under the
terms of the plan, to enforce his rights under the
terms of the plan, or to clarify his rights to future
benefits under the terms of the plan; . . . .

Section 1132(a)(3) provides that an action may be brought to enjoin any
act or practice which violates the terms of the plan.

3
Section 1104 sets out the fiduciary duty of the administrator of a plan to act "solely
in the interest of the participants and beneficiaries," with the care and diligence of a "prudent
man."

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 There are ten types of policies at issue here, and the case hinges on the language

found in the contract plans which insured the plaintiff class. The district court described

this language in the following manner:4

COVERED ELIGIBLE EXPENSES: Unless otherwise
negotiated, we will pay the lesser of the billed charges or the
Usual and Customary charges as set forth in the Schedule of
Benefits for the following necessary medical care, treatment,
services and supplies:

HOSPITAL ROOM AND BOARD: Hospital room and
board including all customary daily services and nursing
charges. The room and board charge shall be limited to an
average semi-private room rate.

In the policies, the term "Usual and Customary" is defined as:

. . . (t)he currently prevailing charge made for a medical
service or item by a majority of health care providers of the
same discipline [or] type within the same geographical area as
determined by the Company. (emphasis supplied)

The policies clearly stated that benefits were not provided for "charges which are

in excess of Usual and Customary."

The trial court noted that while "[s]ome policies contain the word 'the' rather than

'an' average semi-private room rate," the parties agreed that the difference was not

material to a resolution of the dispute. (f.n. 3, p. 4, Slip Opinion)

4
Fredrickson v. Gem Insurance Co., Case No. 2:96CV1092K, (D.C. Utah, April 3,
2000)(Addenda A, Appellants' Brief, Slip Opinion of District Court, pp. 4-5)

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 Plaintiffs claimed that the above language was ambiguous and subject to

clarification by evidence of industry practices. Gem contended that the contract terms

are clear and unambiguous, and under those terms Gem had the clear right to limit

payment of hospital room and board charges to prevailing rates in a geographic area.

The trial court ruled that the contract language was not ambiguous:

Giving the policy language its common and ordinary
meaning as a reasonable person in the position of a plan
participant would have understood the words to mean, Gem's
policy language is not ambiguous. The phrase "an average
semi-private room rate" must be read in conjunction with the
language of the "covered eligible expenses" provision, which
imposes a limitation that Gem "will pay the lesser of the billed
charges or the Usual and Customary charges as set forth in the
Schedule of Benefits." "Usual and Customary" is defined as
"(t)he currently prevailing charge made for a medical service
or item by a majority of health care providers of the same
discipline [or] type within the same geographical area as
determined by the Company." Thus a reasonable person in
the position of a plan participant would understand the words
to mean that Gem would pay the lesser of the billed charge or,
the prevailing, usual, or average charge made for a semi-
private room (as opposed to a private room rate) by a majority
of health care providers of the same type within the same
geographical area as determined by Gem. (Slip opinion, p. 8).

While plaintiffs claimed that Gem's method of computing an average room and

board rate was "irregular" and limited in scope because it surveyed only a "few facilities"

and was not a fair representation of "average," the trial court determined that under the

terms of the insurance plans, Gem had the discretion to set "average amounts" and that its

method of figuring averages was reasonable and fair.

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 In this appeal, plaintiffs contend that the trial court erred in finding that the

contract language was not ambiguous, and that it further erred in approving the

discretionary rates set by Gem.

In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 103 L. Ed. 2d 80, at 95,

(1989), the Supreme Court ruled that a denial of benefits under §1132(a)(1)(B) should be

reviewed under a de novo standard unless the insurance contract gave the administrator

discretionary authority to determine eligibility for such benefits.5

The plaintiffs contend that this court should first address their "notice arguments"

before construing the language found in defendant's insurance plan. This question of

"notice" is based upon plaintiffs' contention that Gem failed to provide "notice" of its

denial of hospital benefits, according to 29 U.S.C. §1022.

Section 1022 provides in pertinent part that:

(a) A summary plan description of any employee benefit plan
shall be furnished to participants and beneficiaries as
provided in section 1024(b) of this title. The summary plan
description shall include the information described in
subsection (b) of this section, shall be written in a manner
calculated to be understood by the average plan participant,
and shall be sufficiently accurate and comprehensive to
reasonably apprise such participants and beneficiaries of their
rights and obligations under the plan. . . .

5
In the trial court Gem contended that, under the Firestone decision, its plan
language gave it discretionary authority to calculate maximum rates, and the standard for any
review of the matter would be reviewed only for an abuse of discretion. and not de novo.
The district court concluded that the result would be the same under either standard. (Slip
Opinion p. 4, f.n. 1)

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 Under paragraph (b) of §1022, the summary plan description must contain "the

plan's requirements respecting eligibility for participation and benefits . . . [and]

circumstances which may result in disqualification, ineligibility, or denial or loss of

benefits. . . ."

We find that the trial court followed the correct procedure in first resolving the

question of ambiguity before proceeding to examine the question of an alleged violation

of the notice requirements. This procedure is appropriate in ERISA cases, where the

plan language should be construed first in order to determine whether that language was

clear and unambiguous. See Chiles v. Ceridian Corp., 95 F. 3d 1505, 1515 (10th Cir.

1996).

The court will review plaintiffs' claim as it would any other contract claim by

looking to the terms of the plan and other evidence of the parties' intent. If plan

documents are reviewed and found not to be ambiguous, then they may be construed as a

matter of law. Chiles, supra, 95 F. 3d at 1511. Language is to be given "its common and

ordinary meaning as a reasonable person in the position of the [plan] participant. . . would

have understood the words to mean." Blair v. Metropolitan Life Ins. Co., 974 F. 2d 1219,

1221 (10th Cir. 1992)(quoting McGee v. Equicor, 953 F. 2d 1192, 1200-1201 (10th Cir.

1992).

"The presence of ambiguity in a contract term must be determined as a matter of

law. . . An ambiguous contract term is one 'reasonably susceptible to more than one

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interpretation'. . ." Carland v. Metropolitan Life Ins. Co., 935 F. 2d 1114, 1120 (10th Cir.

1991), cert. denied, 502 U.S. 1020 (1991) (Citations omitted).

Plaintiffs contend that certain words and phrases have "specialized meanings"

which create ambiguity, depending upon extrinsic matters, beyond the clear language

found in the terms of the insurance Plan. For instance, plaintiffs insist that Gem's use of

the term "average" semi-private room rate creates ambiguity because hospital billing

practices vary. The district court correctly found that the term "average" did not render

the contract ambiguous:

While Plaintiffs have argued that the word "average" is
ambiguous because it actually could mean the mode, the
median, or the mean, and the parties have spent considerable
time on and have provided extensive expert testimony
regarding the various meanings of the word "average," and
whether and how the word differs in meaning from the words
"usual," "customary," "prevailing," etc. and what the average
person would interpret "average” to mean, the court finds that
there is no material ambiguity created by the use of these
various words, particularly when Gem retains the discretion to
determine the rate it will pay by use of the phrase "as
determined by the company." Simply put, a reasonable person
in the position of a plan participant would not be [sic]
interpret Gem’s policy language to mean something materially
different from what it states. In other words, a reasonable
plan participant would not be misled by Gem's policy
language. There is nothing in the plan that requires Gem to
pay a claim simply because most other carriers would pay the
claim if it were presented to them. (Slip opinion at 9)
(emphasis supplied).

Plaintiffs now allege that Gem's plan was ambiguous because it did not provide a

specific definition for the term "average semi-private room rate." This argument was not

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presented to the district court, and it will not be considered by this court for the reasons

set out in Tele-Communications, Inc. v. Commissioner of Internal Revenue, 104 F. 3d

1229 (10th Cir. 1997). In finding that an appellate court will seldom consider an issue

raised for the first time on appeal, we stated:

This rule is particularly apt when dealing with an appeal from
a grant of summary judgment, because the material facts are
not in dispute and the trial judge considers only opposing
legal theories. . . . Propounding new arguments on appeal in
an attempt to prompt us to reverse the trial court undermines
important judicial values. In order to preserve the integrity of
the appellate structure, we should not be considered a
"second-shot" forum, a forum where secondary, back-up
theories may be mounted for the first time. . . . (104 F. 3d at
1232-1233, citations omitted).

Plaintiffs also claim that the phrase "as set forth in the schedule of benefits" makes

the Gem plan ambiguous and subject to misinterpretation. Again, we find that the district

court properly rejected this argument by examining that phrase in the context of a

reasonable person's interpretation of that language:

. . . the fact that the policy states that Gem will pay the lesser
of the billed charges or the Usual land Customary charges as
set forth in the Schedule of Benefits does not introduce
ambiguity. The Schedule of Benefits merely lists such items
as the lifetime maximum benefit, the deductible, the
percentage paid by the insurer, etc. Thus, a reasonable person
in the position of a plan participant would interpret the
language to mean that Gem will pay the lesser of either the
billed charges or the Usual and Customary charges subject to
or as stated in the schedule of benefits, e.g. Gem would pay
the 70% of the Usual and Customary charge after the
deductible was paid, with a lifetime maximum of a certain

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 amount and an out-of-pocket annual maximum of a certain
amount. (Slip Opinion at 9-10).

Gem's definition of "usual and customary" clearly gave notice that limitations

would be "as determined by the Company." See Chambers v. Family Health Plan Corp.,

100 F. 3d 818, 825 (10th Cir. 1996), where the insurance plan excluded medical

procedures "which in the judgment" of the insurer were experimental. See also, Clapp v.

Citibank, N.A. Disability Plan (501), 262 F. 3d 820 (8th Cir. 2001), where the insurance

plan provided that the existence of a "disability" was to be determined by the claims

administrator. The court ruled that the "as determined by" provision was explicit

"discretion-granting language." (262 F. 3d at 827).

We next turn to the question of whether Gem's method of calculating the average

room and board rate limitation was fair and reasonable.

We find that Gem did not abuse its discretion in applying its plan language to

plaintiffs' hospital room and board expenses. Clearly the defendant had discretion to

determine the limits of reimbursement. As noted in the Firestone case, our review is

limited to determining whether Gem's interpretation was reasonable and made in good

faith. McGraw v. Prudential Ins. Co. of America, 137 F. 3d 1253, 1259, (10th Cir. 1998)

The district court found that Gem's procedures in determining the limits of hospital

room and board payments were reasonable and appropriate. This finding was based upon

uncontradicted evidence presented by Gem's accounting expert, Gil Miller. Gem based

its maximum payments of hospital room and board charges on a market-based average of

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general hospitals in Utah through surveys conducted in 1991 and 1994. In the earlier

survey, defendant established the limitation for Utah at $330 per day, effective January,

1991.6

After a 1994 survey, Gem dropped hospitals which charged below market rates

and determined that the average semi-private room rate in Utah was approximately $336

per day, while in the most heavily populated region the rate was $385 per day. Following

this investigation, Gem raised its usual and customary room and board limitation to $400

per day. The $400 figure was greater than or equal to 90% of the rates quoted by Utah

based hospitals in 1994, also in line with rates prevailing in Colorado, Arizona, and

Texas. 7

It appears that in 1997 Gem decided to discontinue its practice of limiting payment

of hospital room and board charges. From this evidence, plaintiffs claim that this

decision establishes an abuse of discretion in the way Gem had previously applied a

limitation.8 Such evidence is not admissible to establish liability because it is evidence of

6
At that time the "average daily semi-private room and board charge for hospitals
within the State of Utah was from $303 and $305 per day.
7
In setting rates in 1994 for hospitals located in Colorado, Arizona, and Texas, Gem
set a "usual and customary" room and board limitation of $440, $460 and $500, respectively.

It appears that this change of policy was made upon the advice of counsel after this
8

class action was filed.

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a subsequent remedial measure under Rule 407 of the Federal Rules of Evidence.9

Furthermore, such evidence is without relevance to the issue of abuse of discretion.

In light of this uncontradicted evidence, we find that the district court correctly

concluded that "there is nothing unreasonable about the way in which Gem calculated its

own internal average or the maximum amounts that Gem would pay. . . while Gem ideally

should have included rates from specialty hospitals and updated its maximum rates on a

more frequent basis, the fact that Gem retained discretion to determine the maximum rate

renders these preferences moot". .(Slip opinion, at p. 12).

In this appeal, plaintiffs reiterate their contention that Gem acted unreasonably in

applying its usual and customary limitation because its actions violated the provisions of

29 U.S.C. §§1022, 1104, and 1133, and by significantly deviating from "industry

standards" in computing room and board reimbursement in breach of defendant's

fiduciary duties. They further allege that Gem violated §1133 of ERISA because it did

not specify the reason for the partial denial of reimbursement for room and board charges.

29 U.S.C. §1133 sets out claims procedures in this manner:

In accordance with regulations of the Secretary, every employee benefit plan shall-

9
Rule 407 provides in pertinent part that:

When, after an injury or harm allegedly caused by an event,
measures are taken that, if taken previously would have made
the injury or harm less likely to occur, evidence of the
subsequent measures is not admissible to prove negligence,
culpable conduct, . . .

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 (1) provide adequate notice in writing to any participant or
beneficiary whose claim for benefits under the plan has been
denied, setting forth the specific reasons for such denial,
written in a manner calculated to be understood by the
participant, and
(2) afford a reasonable opportunity to any participant
whose claim for benefits has been denied for a full and fair
review by the appropriate named fiduciary of the decision
denying the claim.

Under the regulations applicable to this section, the denial notice must contain:

(1) The specific reason or reasons for the denial; (2) specific
reference to the pertinent plan provisions on which the denial
is based; (3) a description of any additional material or
information necessary for claimant to perfect the claim and an
explanation of why such information is necessary; and (4)
appropriate information as to the steps to be taken if the
participant or beneficiary wishes to submit his or her claim for
review. [29 C.F.R. §2560.503-1(f).

Substantial compliance with the requirements of §1133 is sufficient. Sage

Automation, Inc., Pension Plan and Trust, 845 F. 2d 885, 893, 895 (10th Cir. 1988).

The district court found that any deficiency with regard to §1133 was moot since

plaintiffs had failed to establish that Gem had improperly computed reimbursement rates:

While it may be true that Gem has failed to comply with at
least some of the notice requirements under section 1133, the
court does not reach this issue. Even if Gem has violated
Section 1133, a deficient denial notice will not necessarily
entitle a claimant to benefits. A substantive remedy is
appropriate only where the defect in the denial notice causes a
substantive violation or worked a substantive harm. . . In
other words, if after judicial review, it appears the
administrator or fiduciary was correct in its decision, the court
will uphold that decision even in light of a violation of
Section 1133. . . .

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 Consequently, no substantive remedy is available, and all
equitable remedies that might be available. . . . are moot in
light of the court's determination that the policy language is
not ambiguous. . . . (Slip opinion, pp. 15-16)(citations
omitted)

In this appeal, plaintiffs also claim that Gem failed to comply with the provisions

of 29 U.S.C. §1022 which involves the requirement that a "Summary Plan Description"

(SPD) be provided to all participants and details of all of the information that should be

included in this plan. In this regard plaintiffs complain that Gem's SPD did not inform

plaintiffs that charges for hospital room and board were subject to a "usual and

customary" rate limitation.

In the district court, plaintiffs raised the claim that Gem's method of payment

violates the provisions of §1022 and Utah state law.10 While the trial court noted that

plaintiffs "have ostensibly relied on these statutes as further evidence that Gem's policy

language is ambiguous or that its survey methodology is unsound," it disposed of the

issue in this manner:

While it is possible that Gem has violated the Utah statute,
this violation is irrelevant for purposes of these summary
judgment motions. Although the court does not rule on the
possible violations of these statutes, violations of either
statute have no bearing on whether the policy language is
ambiguous or whether Gem's survey methodology was
reasonable. To the extent that Plaintiffs are moving for
summary judgment on these statutory violations, the motion is

10
The provisions of §1022 appear supra, at p. 6.

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 denied because Plaintiffs have not alleged violations of these
statutes in their Complaint. (Slip opinion, p. 6,
f.n.5)(Emphasis supplied).

We agree with the conclusion of the trial court that §1022 has no relevance to the

primary issues of whether the policy language is ambiguous, or whether its method of

setting room and board limits was reasonable.

Finally, plaintiffs allege that their ERISA claims are subject to a six-year statute of

limitations period, the period applicable to a claim for breach of fiduciary duty. We agree

with the conclusion of the trial court that inasmuch as we find that Gem's insurance plan

was not ambiguous and that Gem's calculation of room and board rate limits was a

reasonable one, the question of the statute of limitations is moot.

We AFFIRM the district court's grant of summary judgment to the defendant.

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